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Friendly Fraud – All to Blame for E-Commerce’s Worst Enemy

By now, everyone knows that Facebook not only cashed in the rampant friendly fraud generated by kids unintentionally or without parents’ knowledge downloading games from the platform, but it encouraged the practice.

A few years ago, the social media giant informed its employees of friendly fraud and explained how it should not try to block it.  The result was some kids spending thousands of dollars and their parents initiating chargebacks, hitting Facebook with a whopping nearly 10% in chargebacks. That’s a lot of chargebacks. To give you some perspective, the Federal Trade Commission considers businesses with a 2% chargeback ratio engaging in deceptive business practices.

Unfortunately, Facebook is not the online business to facilitate friendly fraud . Also, Facebook is not the only one at fault. Merchants, banks, regulators, and consumers share the blame, too. Consumers want instant gratification, so to give them what they want, merchants increase prices, reduce security to improve authorizations, and have employed all types promotions and scams to make them happy. While doing so, they also created a culture conducive to friendly fraud. Without global regulation, expect the situation to get worse.

Understanding the Different Types of Fraud

Most people are familiar with fraud, like someone using a stolen credit card or another’s person identity to make a purchase. Merchants have taken many steps, like two-step authentication and other efforts, like facial recognitions, to prevent this type of fraud. However, other types are becoming more rampant and causing greater problems.

Friendly fraud is when a shopper intentionally seeks a refund for a charge from its card company instead of a merchant because the person does not want to pay for the product or service he/she purchase. It’s akin to shoplifting, because they want to keep something without paying for it.

Unintentional or accident friendly fraud most often occurs when a merchant has poor customer service, poor refund and return policies, and bad business models. In most cases, consumers are unable to get anywhere with merchants, so they initiate chargebacks. This is also the case when people download apps in which it was not clear that there was a cost to get them. Another type is when child accidentally downloads a game because he/she didn’t know his/her parents’ credit card was connected to the device being used.

Though the charge was definitely a mistake, parents need to take steps, such as adding parental controls, to prevent this. Regularly monitoring your child’s behavior also can help. In all actuality, the unauthorized charge should real be the cardholder’s fault not the merchant.

How to Fix the Problem

Merchants need to recognize all types of fraud, have appropriate tools in place to prevent them, and use a chargeback mitigation tool. Also, regulars and governments need to start thinking about how they can help before brands get completely destroyed and lose greater value. If this happens, and competition dwindles, the consumers will ultimately pay the price. Unless governments, including the U.S., step up to the plate and regulate the internet on a global level, all parties involved will continue to feel the financial pinch.

In Conclusion

Companies will have to strike a balance between satisfying customers demands and taking the actions they need fight friendly fraud. Merchants also should push pressure on banks and regulators to do their parts, as well.

If you are a merchant that needs merchants services, including fraud protection and chargeback mitigation tools, then consider (EMB). EMB’s partners with a system that can mitigate one in four chargebacks. Apply online today.